Marginal tax rates on foreign profits of U.S. multinationals

Abstract

Many studies find that taxes influence capital location, income shifting, and capital structure decisions of multinational companies. So, reasonably estimating the marginal tax effect of international business decisions is important. However, simple marginal tax rate (MTR) proxies, such as a foreign country's top statutory rate or a rate that assumes remittance of all foreign profits as current dividends, fail to capture many tax law complexities. This article develops an algebraic “mixed remittance” model for calculating a U.S. company's MTR on its foreign subsidiary's profits. In contrast to the simpler proxies, the mixed remittance model allows foreign profits to be remitted in different forms (i.e. not just as dividends) and across varying time periods (i.e. not just the current period[t Also, the mixed remittance model considers withholding taxes, tax deferrals from postponed dividends, and foreign tax credit positions. Paired t-tests show that the resulting MTR measure often differs significantly from the two simpler MTR proxies.